US Decarbonization Effort

The US government is introducing legislation that will greatly impact the energy, gas, and related industries. Called the Inflation Reduction Act of 2022 (IRA), the $369 billion bill aims to invest in the American economy and lower carbon emissions through increased federal regulation. It targets a 40% reduction in greenhouse gases (GHG) by 2030, using 2005 levels as a reference. While the bill is being praised as an environmental leap forward, there are concerns regarding extensions of Environmental Protection Agency (EPA) powers.

EPA Authority Shift

The IRA gives new authority to the EPA by requiring certain facilities to report methane emissions under the Greenhouse Gas Emissions Reporting Program (GHGRP). The methane fee penalizes those found emitting excess levels of CH4 (more than 25,000 metric tons of CO2-equivelant GHG a year). These are onshore and offshore natural gas operations, gas storage, import and export equipment, gathering and boosting, and transmission pipelines. It’s a reversal of the recent SCOTUS EPA ruling curtailing the EPA’s ability to track GHG emissions under the Clean Air Act.

As operational costs increase, more care will need to be taken to keep levels below the threshold. It’s a penalty of $900 per metric ton of methane, going up to $1,500 after two years. The measures are set to begin in 2024, with tougher restrictions on the way by 2026. These sweeping rules redefine how the industry will need to view GHG, and how best to address it from a cost-analysis perspective.

Anne Bradbury, Chief Executive of the American Exploration & Production Council, argues that taxation is not “the best mechanism” for addressing CH₄. While heads of energy companies are attempting to ease the concerns of investors, the truth is that operating costs will increase and probably lower production and overall profitability.

Green Money

Financial incentives are the highlight of the IRA. Clean energy tax credits are being expanded, which quickens growth for wind, solar, batteries, and electric vehicles. Billions will end up in nuclear, hydrogen, carbon capture methods and storage, and electric heat pumps. The US might see a shift in how it generates power, with a boost for renewables due to comparably lower costs.

There is a slew of changes for renewables. The Innovative Technology Loan Guarantee sets aside $40 billion for projects that cut back on GHG emissions. Batteries using critical minerals (lithium, nickel, cobalt, manganese, and graphite) from foreign entities of concern (China, Russia, North Korea, Iran, and more) are no longer eligible for tax breaks. Solar, wind, and batteries will receive $30 billion through 2030 for the production of domestic components.

Electricity Pie

Lawmakers are playing a tricky hand. Petroleum is the most abundantly used source in energy generation, followed closely by natural gas, with renewables lagging behind. Congress wants to shift that dynamic, taking a bigger bite of the pie for renewables. The IRA requires increased decarbonization and the development of more renewable projects in the coming decade. While the overall goal is carbon curtailment, ultimate economic outcomes remain unknown. It will be interesting to see how these new measures play out over the long term.